Will Starbucks' Mobile Initiatives Spur Traffic In FY15?

On Dec 3, we issued an updated research report on Starbucks Corporation SBUX.

Starbucks reported soft fourth-quarter fiscal 2014 sales results on Oct 30 and issued weaker-than-expected outlook for the next quarter.

Starbucks' adjusted earnings of 74 cents per share were in line with the Zacks Consensus Estimate. However, earnings grew 23% year over year driven by margin expansion which made up for a relatively soft top line. Lower comps due to soft traffic trends in the Americas and lower ticket in China-Asia-Pacific hurt sales.

In the Americas, comps slowed down to 5% from 6% in the previous quarter due to a difficult retail environment which hurt traffic growth. Management stated that slower-than-expected traffic in the American stores was the result of continued shift away from “brick and mortar” retail to online sales.

Moreover, the first-quarter earnings outlook fell short of expectations due to higher marketing investments planned for the upcoming holiday season and the ongoing employee investments.

Despite soft fourth-quarter results, a strong holiday line-up, including the new Chestnut Praline Latte, Starbucks for Life contest and Starbucks gift card program should spur traffic in the next quarter.

Starbucks plans to roll out the “mobile order and pay” initiative in Portland in Dec 2014 and nationwide by 2015-end. This will allow customers to order ahead of arriving at a store. The company also expects to introduce food and beverage delivery through their mobile devices in select urban markets in the second half of 2015. These mobile initiatives are expected to improve customer loyalty thereby driving Starbucks' business.

We believe these digital efforts, coupled with the La Boulange bakery platform, new handcrafted beverages, revamped lunch and evening program, Teavana tea and K-Cups innovations should spur traffic growth as fiscal 2015 unfolds.

Meanwhile, Starbucks enjoys healthy fundamentals — strong global retail footprint, successful food/beverage innovations, best-in-class loyalty program and digital offerings, rapid growth in international markets and impressive CPG growth.

Stocks to Consider

Starbucks carries a Zacks Rank #3 (Hold). Better-ranked restaurateurs include BJ's Restaurants, Inc. BJRI, DineEquity, Inc. DIN and Ruby Tuesday, Inc. RT. All these stocks sport a Zacks Rank #1 (Strong Buy).

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